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Misfortune and Mistake: The Financial Conditions and Decision-Making Ability of High-Cost Loan Borrowers

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  • Leandro Carvalho
  • Arna Olafsson
  • Dan Silverman

Abstract

The appropriateness of many high-cost loan regulations depends on whether demand is driven by financial conditions (“misfortunes”) or imperfect decisions (“mistakes”). Bank records from Iceland show that borrowers have especially low liquidity just before getting a loan. Borrowers exhibit lower decision-making ability (DMA) in linked-choice experiments: 45% of loan dollars go to the bottom 20% of the DMA distribution. Standard determinants of demand do not explain this relationship, which is also mirrored by the relationship between DMA and an unambiguous mistake. Both misfortune and mistake thus appear to drive demand.

Suggested Citation

  • Leandro Carvalho & Arna Olafsson & Dan Silverman, 2024. "Misfortune and Mistake: The Financial Conditions and Decision-Making Ability of High-Cost Loan Borrowers," Journal of Political Economy, University of Chicago Press, vol. 132(9), pages 3173-3213.
    • Handle: RePEc:ucp:jpolec:doi:10.1086/730200
    DOI: 10.1086/730200
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    Cited by:

    1. Zachary Bethune & Joaquín Saldain & Eric R. Young, 2024. "Consumer Credit Regulation and Lender Market Power," Staff Working Papers 24-36, Bank of Canada.

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